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Lower Volumes; Less Capacity in Trucking

Feb 04, 2009

Less-than-truckload capacity has declined in each of the last nine months through November 2008, reports Stifel Nicolaus.

“With Alvan Motor Freight, Inc. and Jevic Transportation failing earlier last year, and with YRC Worldwide’s aggressive downsizing program, it is no surprise that we have seen capacity come out of the LTL industry,” comments analyst John Larkin.

Though rolling stock has come out of the market, all of the terminals and service centers still remain in place, so the LTL capacity reductions aren’t exactly the permanent capacity reductions that we see on the truckload side, he adds.

Less-than-truckload capacity has declined in each of the last nine months through November 2008, reports Stifel Nicolaus. “With Alvan Motor Freight, Inc. and Jevic Transportation failing earlier last year, and with YRC Worldwide’s aggressive downsizing program, it is no surprise that we have seen capacity come out of the LTL industry,” comments analyst John Larkin.

Though rolling stock has come out of the market, all of the terminals and service centers still remain in place, so the LTL capacity reductions aren’t exactly the permanent capacity reductions that we see on the truckload side, he adds.

Donald Broughton at Avondale Partners provided data showing the rate of trucking company failures by quarter, extending back to 1990. “In 2008, we estimate that roughly 130,000 to 140,000 trucks came out of the industry due to company failures,” says Larkin. That amounts to an additional 6.5% capacity reduction on top of the 6.5% related to carriers downsizing their average fleet size.

In a more normal economy, the expection would have been for the latter part of 2008 and 2009 to be a strong year for vehicle purchases given the 2010 EPA mandated standards on nitrous oxide emissions. But a pre-buy similar to that preceding the last set of emissions standards for Class 8 trucks is clearly not materializing given the weakness in freight volumes. FTR Associates suggest a 2009 production rate as low as 75,000 units, down from the more normal rate of roughly 200,000 units. “This is well below the replacement rate, and this should also bring on some capacity reduction as we go forward into 2009,” Larkin continued.

Among the long-haul truckload carriers, JB Hunt had a company truck count of 4,233 in January 2007 and 2,666 on September 30, 2008, a drop of 37%. It also went from 962 owner operators to 643, a 33% drop. Werner Enterprises went from 8,180 company trucks to 7,335, a 10% drop. And it decreased owner operator trucks from 820 to 705 or 14%.

Covenant Transport went from 3,576 company trucks to 3,332, down 7%. It decreased its owner operator fleet from 143 to 80, a 44% drop. In total, that's 17,914 trucks on January 1 2007 and 14,761 on Sept 30 2008, a drop of 3,153 trucks or nearly 18%.

Though hardly a bright spot for carriers, Larkin reports Stifel Nicolaus has heard spot rate quotes of around $0.80/mile, which, he says, probably doesn’t even allow the capacity provider to cover variable costs, much less fixed costs.

On pricing, he notes 2009 is not going to be a great year for the carriers, but it could be a solid year for shippers, especially with fuel prices having come way off and the corresponding fuel surcharges having dropped. “Shippers are going to be the beneficiaries, certainly, in the next couple of quarters. As we get deeper into 2009, however, and the economy begins to show some signs of recovery, and especially if we see more exiting capacity in the first half of 2009, we could start to see some very modest rate increases being filtered in. That momentum should build through 2010, and we are thinking perhaps peak out sometime in 2011, with 4% rate increases at that juncture,” says Larkin. “It is conceivable that the rate increases could be more dramatic then 4%, as we saw in 2004 and 2005, but right now it is awfully difficult to make that prediction.

LTL pricing, unlike the pricing for TL, includes a fuel surcharge. “LTL pricing has turned decidedly more negative over the next few quarters. Fuel surcharge revenue has obviously come off with the drop in fuel prices, which negatively impacts pricing,” Larkin comments.

Additionally, he says, there are a couple of LTL carriers that are in fairly rough financial shape; they are struggling to hold onto volume. “In the LTL business you have a network that has a voracious appetite for volume, and one of the ways to keep volume running through that network is to lower pricing. It is very difficult to downsize your way to prosperity in a networked business such as LTL, so adjusting pricing downwards is a strategy that some carriers are adopting. We think that this strategy may ultimately end up taking more capacity out of the industry than anything else”. As the economy begins to recover later in 2009 and into 2010, this should create a rate environment more favorable to carriers, as rate increases build through 1%, 2%, 3%, and up to nearly 4% by 2012.

“I believe it is safe to say that we are currently in uncharted waters, certainly since deregulation, given the rapid decline in demand we have seen and the vast amount of capacity that has, and is continuing to, simultaneously come out. In such an environment, it is quite difficult to predict the future with great clarity,” concludes Larkin. “There is one good piece of news. It is that, with each passing day, we are one day closer to the end of the recession. By the end of this year, I think the freight environment may be feeling a little bit better. I also think that ultimately, once [carriers] retake pricing power from shippers sometime over the next 12 to 18 months, carriers will be in a very strong position by 2011, if not earlier. Carriers will be able to really start expanding their margins fairly dramatically. This scenario could take place even sooner if carrier failures continue, or if one or more very large companies fail, and that is a pretty distinct possibility at the moment. The future should be bright for the surviving carriers, once freight demand fully returns.”